—Saiful Islam—

The government of Bangladesh has recently increased the VAT and SD rates on over 100 items, sparking a new wave of debate and mixed reactions among the public. Undoubtedly, taxes and VAT are among the largest sources of government revenue. However, excessive VAT rates have become burdensome, particularly for the middle-income class. The decision to hike taxes has disproportionately impacted the middle class compared to other social groups. As the primary consumers of most commodities, the middle class bears the brunt of this additional tax burden.

No doubt, the interim government is under tremendous pressure, as the National Board of Revenue (NBR), its sole revenue department, managed to collect only Tk1.3 lakh crore in revenue over the past six months. This is a poor outcome, and has compelled the government to set an unrealistic target of collecting Tk4 crore within the next five months.

Adding to the pressure, the International Monetary Fund (IMF) has imposed conditions requiring the government to increase revenue and reduce income-expenditure gap. Furthermore, the government has decided to provide an additional dearness allowance to its employees, requiring Tk7,000 crore in extra funds. As a result, the government has resorted to hiking VAT and SD rates.

Now, the question arises: Is raising taxes the only solution? Surely, not. The government should carefully review its decision before implementing such measures. While the government expects to earn an additional Tk12,000 crore from the increased VAT rates, this amount is relatively small compared to the heavy toll it imposes on middle- and lower-income people. The decision to hike VAT may backfire, as people might resort to tax evasion due to the higher rates. This could result in the government losing revenue instead of collecting more.

If we examine the list of items come under increased VAT rate, we see that most are essential commodities primarily used by the middle class. This raises another critical question: Is the middle class being made to shoulder the burden of money laundering and state corruption? Is it fair to target these commodities?

According to newspapers, the price hikes have adversely affected small and medium businesses, restaurant owners, fruit sellers, and others, as their sales are likely to decline. The government should explore alternative ways to increase revenue, given that a significant portion of the population remains outside the income tax net. Efforts should be made to improve the system and ensure all eligible individuals to pay their taxes. Shockingly, the GDP-to-tax ratio remains alarmingly low because only a small fraction of the population pays income tax.

The government could attract foreign investors to boost Foreign Direct Investment (FDI), thereby generating more revenue and foreign currency. Additionally, they could promote the tourism sector globally, as some countries rely heavily on tourism for revenue. This could be a promising avenue for government earnings.

Several government-owned businesses, such as those in the jute and sugarcane industries, were shut down without sound justification. Similarly, public transport services run by the government incur annual losses due to corruption and poor management. If these sectors were managed efficiently and in compliance with regulations, they could become significant sources of revenue. In addition, the government should prioritise recovering laundered money that has been illegally sent abroad. According to media reports, a significant amount of money has been transferred illegally. If the government could recover this, it would be a massive achievement.

What will be the impact of these decisions? If we assess the situation, it is clear that higher commodity prices will reduce people’s purchasing power, causing them to buy less. This will lead to decreased demand, prompting producers to reduce production. Sellers will also experience lower sales, forcing them to lay off employees, which will further exacerbate unemployment. Unemployment could lead to social unrest.

To address these challenges, the government should focus on the remittance sector, which is a cost-effective way to earn foreign currency. Training young manpower and streamlining services for remittance workers could significantly enhance this sector. Services for remittance workers should be automated and made more efficient.

In conclusion, while increasing VAT and SD rates may provide short-term revenue gains, the government must consider the broader economic and social implications of its decisions. A more balanced and sustainable approach is essential to ensure equitable economic growth and stability. The government should implement additional measures to support the middle and lower-middle classes in coping with the price hikes. Without such measures, these groups will face significant hardships. While the government has historically taken steps to assist the lower-income groups, such as providing commodities through TCB at comparatively lower prices and implementing various social safety net programmes, little to no significant action has been taken to support the middle or fixed-income groups. This is concerning, as the middle class is one of the largest contributors to government revenue.

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The writer is a lecturer at the Department of Public Administration, Begum Rokeya University, Rangpur, and can be reached at [email protected].